The Goldman Standard

Wall Street was at least momentarily reassured today by Warren Buffet's $5 billion investment in Goldman Sachs. He also has warrants for the purchase of $5 billion more over the next 5 years.

Wall Street seldom gets it right on the knee jerk reaction. A closer look at the deal reveals a troubling precedent. Buffet got perpetual preferred stock yielding a whopping 10% return. Goldman can buy him out at some point, but must pay a 10% premium in order to do so. His warrants give him the right to purchase more stock at $115/share. That's about a 10% premium, even over today's price.

In effect, Goldman, and some of the most experienced financial brains on Wall Street, have accepted an enormous, long term financing deal at 10% interest. If this is the current market rate, that does not bode well for interest rates or inflation. Goldman is betting both are going much higher.